Is it better to invest in your primary residence or another property?
In Spain, investing in real estate has a long history. For many, property has been the traditional way to make savings profitable. However, as we know, it’s not easy to save enough money to buy a property, renovate it, and sell or rent it out—especially when it’s already difficult to access your first home. This raises an interesting question: is it more profitable to buy a primary residence to live in or to invest in a second property as a source of income? As we will see, both options have advantages and disadvantages, and the answer depends on various factors, including financial goals, market conditions, and personal needs.
Option A: Investing in your primary residence
Buying your primary residence is, for most people, the first major financial step in life. It’s a long-term investment that provides stability and security. However, it’s not always the best option from a purely financial perspective. Here are some key aspects to consider:
Advantages
1. Security and stability: By buying a home to live in, you secure a roof over your head and eliminate reliance on renting, which removes the uncertainty of rent increases or being forced to move.
2. Long-term savings: Although buying a home involves a significant initial investment (down payment, taxes, etc.), it may prove cheaper in the long run compared to renting. With a mortgage, you’re paying to own an asset, while rent is an expense that doesn’t generate ownership.
3. Appreciation: In many cases, primary residences tend to increase in value over time. If purchased in a good location, it can result in a long-term profit when sold in the future, in addition to having enjoyed living in it.
Disadvantages
1. Low liquidity: Investment in a primary residence is not liquid. Although its value may increase over time, you cannot easily access that money without selling the property. If you need cash, your home isn’t an immediate source of liquidity.
2. Maintenance and recurring expenses: Owning a home means covering all maintenance, repair, and improvement costs. These expenses can be high and aren’t always anticipated.
3. Limited investment opportunity: The capital invested in your primary residence is tied up. If you choose to buy a more expensive property than you need, you might miss the opportunity to use those funds for other investments that could offer higher returns.
Option B: Investing in a second property
The second option is to invest in a property that isn’t your primary residence, with the goal of generating passive income through rent or benefiting from the property’s long-term appreciation. Let’s look at the pros and cons of this type of investment:
Advantages
1. Income generation: A second property can become a source of steady income if rented out. In the current context of low interest rates, rental yields can be attractive, especially in areas where rental demand is high.
2. Diversification: Investing in a second property allows you to diversify your assets. While your primary residence covers your personal needs, a second property is an asset that can generate income and help you mitigate the risk of concentrating all your capital in one type of investment.
3. Appreciation: As with a primary residence, a second property can appreciate over time. However, in this case, you can choose to sell it when you feel you’ve obtained the expected return without affecting your lifestyle.
4. Tax advantages: In Spain, Law 12/2023 offers benefits to landlords renting out properties, such as an income tax rebate of up to 90% for small landlords—the general rate will be reduced to 50%.
Disadvantages
1. Vacancy risk: If you choose to rent the property, there’s always the risk of not finding tenants—lost income—or of tenants not paying on time. This could impact your income and force you to cover property expenses while it’s vacant.
2. Additional costs: Being an investment, the second property also comes with expenses such as taxes, maintenance, and insurance. These are in addition to management fees if you decide to hire a company to handle the rental.
3. Time and resource management: Owning and managing a second property requires time and effort, especially if issues arise with tenants or the property itself. If you have no experience in property management, it can become a source of stress.
What should I consider?
When deciding whether to invest in your primary residence or a second property, it’s important to consider the following factors:
Financial goals: If your main goal is stability and long-term savings, buying your primary residence may be the best option. However, if you aim to generate additional income and take advantage of the real estate market, a second property could offer better returns.
Market conditions: The current state of the real estate market and short- to medium-term forecasts are also crucial. A growing market may present more opportunities to invest in a second property, while a contracting market might make it wiser to focus on your primary residence.
Financial capacity: It’s essential to evaluate your ability to finance an additional investment. Mortgages for second properties usually come with stricter conditions, and you’ll need to ensure you can cover payments even in case of vacancies or unexpected expenses.
In summary, there is no one-size-fits-all answer, but analyzing your financial and personal goals will help you make an informed decision on whether it’s better to invest in your primary residence or in a second property.
Advantages of real estate crowdfunding
In addition to traditional options of investing in a primary residence or a second property, an increasingly popular alternative is real estate crowdfunding. This model allows small investors to access the real estate market without needing to purchase a full property, thereby diversifying their investment portfolio. Below are some of the key advantages of real estate crowdfunding:
Access to large projects with small investments: Crowdfunding enables investors to participate in large-scale real estate projects without needing to commit large amounts of money. On platforms like Urbanitae, it’s possible to invest in real estate projects with relatively low contributions, democratizing access to this type of investment.
Investment diversification: Through crowdfunding, it’s possible to diversify capital across several real estate projects, reducing the risk associated with concentrating all your investment in a single property. By spreading the investment across different types of projects and locations, risks are mitigated, and the potential for positive returns is increased.
Flexibility and liquidity: Unlike investing in physical properties, which can require significant capital and offer low liquidity, crowdfunding provides greater flexibility. Projects have defined timelines, allowing investors to plan more precisely when they will recover their investment and earn profits. Moreover, some platforms allow early sale of shares on secondary markets, offering more liquidity than a physical property.
Access to high-return projects: Many of the projects available on real estate crowdfunding platforms offer more attractive returns than what you might achieve with a rental property. This is particularly true for development projects, where the return potential can be high, though with a higher level of risk.
Transparency and control: Crowdfunding platforms like Urbanitae provide detailed information about each project, including feasibility studies, market analysis, and profitability projections. This transparency is key for investors to make informed decisions. Additionally, many platforms have expert teams managing and overseeing the projects, freeing the investor from the direct management burden associated with owning a rental property.
Lower responsibility and operational risk: Unlike direct property investment, real estate crowdfunding doesn’t involve managing the property or responsibilities like maintenance or tenant issues. The investor only needs to focus on the performance of their investment, while platform professionals handle the project’s operational management.